The Dollar Bounces Back After Fed Official Pushes Back on Rate Cut Expectations
The dollar rebounded on Friday following comments from Federal Reserve Bank of New York President John Williams, who pushed back against market expectations of rate cuts. However, the dollar index is still on track for its worst weekly performance in a month.
Earlier in the week, the dollar had tumbled after updated interest rate projections from Fed officials showed an expectation for 75 basis points in cuts in 2024. Fed Chairman Jerome Powell’s remarks were also interpreted as more dovish, suggesting a possible discussion of rate cuts.
But Williams stated that it’s premature to speculate about rate cuts and that the Fed is not currently discussing them. This reinforces the fact that the Fed remains data-dependent and is not endorsing what the market is pricing in.
Rebalancing Positions and Skewed Positioning Influence Dollar Movement
Bipan Rai, North American head of FX strategy at CIBC Capital Markets, noted that a significant part of the dollar’s movement this week has been due to rebalancing positions. Many positions were heavily tilted towards the greenback and focused on specific currency pairs, such as against the Japanese yen.
Rai explained that the dollar’s movement is more about rebalancing than a dovish interpretation of Powell’s remarks. Traders are currently pricing in aggressive expectations for rate cuts, with the first reduction likely to occur in March and a total of 145 basis points in cuts expected by December.
Dollar Index Rises, Euro and Sterling Fall
The dollar index rose by 0.39% to 102.35 on Friday after hitting its lowest level since August 10 on Thursday. The euro fell by 0.64% to $1.0920, while sterling dropped by 0.42% to $1.2711. Both currencies had reached their highest levels in months on Thursday.
The euro and sterling were supported by the European Central Bank (ECB) and Bank of England, respectively, as both institutions pushed back against rate cuts. However, investors are still betting heavily on rate cuts from both central banks in the coming year.
Euro Zone Business Activity Deepens Downturn
The euro was further impacted by surveys showing a deeper downturn in euro zone business activity in December. This unexpected decline added to concerns about the region’s economic growth.
Meanwhile, the Bank of Japan is set to meet next week, and traders and investors are speculating on whether the bank will signal a change in its policy of keeping interest rates at rock bottom.
Bitcoin Falls Amidst Dollar Rebound
Bitcoin also experienced a decline, falling by 1.9% to $42,217 amidst the dollar’s bounce back.
Hot Take: Dollar Rebounds as Fed Official Rejects Rate Cut Expectations
The dollar regained strength after Federal Reserve Bank of New York President John Williams dismissed market expectations of rate cuts. Despite this recovery, the dollar index is still on track for its worst weekly performance in a month. The dollar’s movement has been influenced by rebalancing positions and skewed positioning rather than a dovish interpretation of Fed Chairman Jerome Powell’s remarks. The euro and sterling fell as the ECB and Bank of England resisted rate cuts, although investors continue to anticipate them. Surveys indicating a deepening downturn in euro zone business activity further impacted the euro. Bitcoin also saw a decline amidst the dollar’s rebound.
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